From 1988 through 2007, Curt Schilling amassed an impressive resume as a MLB pitcher. At the helm of retirement in late 2006, Schilling attempted to find similar success in a new career by launching the video game development company 38 Studios, LLC. Known largely for his play with the Boston Red Sox, the company was founded in Massachusetts. However, in 2010, the company moved to Rhode Island. This move was due largely to the enticing cash bonds 38 Studios, LLC received from the state of Rhode Island. According to reports, these bonds totaled $49.5 million. 38 Studios, LLC was expected to repay these bonds. Its most recent payment to bondholders was 17 days late. In the wake of being unable to pay its bondholders, 38 Studios, LLC recently laid off its entire staff. Its Chapter 7 bankruptcy filing came today.
Chapter 7 bankruptcy is a process whereby a debtor liquidates its assets. It differs from other types of bankruptcy in that it does not offer a reorganization plan. Thus, unless a trustee otherwise orders, 38 Studios, LLC will likely cease all business operations. As such, it will sell its property and distribute those proceeds and any other assets to its creditors.
A review of 38 Studios, LLC’s bankruptcy petition provides some insight into the company’s assets and liabilities. It also demonstrates some of the potentially risky situations that the company entered into.
First, the petition lists 38 Studios, LLC’s total assets as being $21,679,906.35, which is made up entirely of the company’s personal property. The personal property includes money in bank accounts, security deposits, insurance policy interests, stock in 38 Studios Baltimore, LLC, notes receivable for relocation loans given to former employees, intellectual property, office equipment, and prepaid expenses.
As noted above, 38 Studios, LLC included notes receivable for relocation loans given to former employees as one of its assets. This item sheds light on a potentially financially problematic practice that the company entered into. According to the bankruptcy petition, 38 Studios, LLC was a party to a contract with MoveTrek Mobility, LLC. Under this contract, MoveTrek made mortgage payments on the former homes of specific 38 Studios, LLC employees and assisted in the sale of their homes, pursuant to 38 Studios, LLC’s relocation policy. Notably, there were six 38 Studios, LLC employees who were participating in this program. Their total mortgage balances amounted to $1,939,783.00. Taking into consideration the current estimated sales prices of their homes along with commissions and fees, 38 Studios, LLC claims its expected liability from this program is $303,921.00.
Another interesting issue related to the personal property listed by 38 Studios, LLC deals with intellectual property. According to the filing, the company held two registered trademarks and had filed applications for five other trademarks. The company only held one registered copyright. Most notably though, were the statements related to 38 Studios, LLC’s patents. Although the process to obtain a patent is time-consuming, it is somewhat surprising that a video game development company in existence since 2006 only held one patent. Along with that patent, the company only had one pending provisional patent application. However, this patent application was under the system’s inventors names and it had not been assigned to 38 Studios, LLC. Likewise, that the company’s inventors held the patent rights to the systems they were developing while employed by 38 Studios, LLC is somewhat surprising. Typically, companies enter into agreements with employees whereby employees assign their intellectual property rights, including patents, for things they invent while working for the company, to the company.
38 Studios, LLC’s liabilities greatly outnumbered the company’s assets at $150,670,195.97. The bulk of the company’s liabilities was in the form of secured creditors’ claims. The two largest claims were owed to the Rhode Island Economic Development Corporation and the Bank of New York Mellon. These claims arose from secured bond debt which 38 Studios, LLC obtained when it received the $49.5 million in bonds from Rhode Island. This debt was secured by a blanket lien on 38 Studios, LLC’s assets. The total liability caused to the company by this debt amounted to $115.9 million.
It’s unfortunate that a talented player like Schilling finds himself in this situation. Per reports, the former pitcher has indicated that he has poured a sizable amount of his life savings into trying to rescue the company. Given that 38 Studios, LLC filed for Chapter 7 bankruptcy, it is unlikely that the company will see another day in business upon completion of the bankruptcy proceedings.